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Public works continue to drive growth in the construction sector in the second quarter as contractors expect interest rates to fall in the second half of the year.
“At the five-month point in the year, construction starts are expanding at a modest pace and the dollar value of construction starts is up 11% year-to-date through May,” says Richard Branch, chief economist at Dodge Construction. Net. “However, this expansion is largely bifurcated, with publicly funded projects outpacing the private sector.”
During the first five months of the year, residential construction starts are up 16%, according to Dodge. Single-family starts increased by 29%. “All the growth is coming in single-family, despite mortgage rates staying close to 7%,” says Branch, while multi-family has been down, with starts down 5% over the same period from last year The largest multifamily projects to break ground in the past two months were the $270 million Innovative Urban mixed-use project in East New York and the $200 million Atlantic Club in Long Branch , NJ.
In the non-residential market, starts were up 3% year-to-date through May. The increase is “mainly driven by the institutional sectors of health, education, recreation and transportation,” says Branch. On the commercial side, hotel starts experienced the only increase, at a rate of 63%. Among the largest non-residential projects breaking ground in the second quarter were UC Davis Health Medical Center’s California Hospital tower in Sacramento and the $2.1 billion Tennessee Titans football stadium in Nashville .
Non-building starts, still bolstered by funds from the Infrastructure Investment and Employment Act, have increased by 17% in the first five months of 2024. All types of starts in this market experienced increases over the same period of last year, led by public service companies with 35 years. % and environmental public works, at a rate of 24%. The largest infrastructure projects that broke ground in April and May were the $10.5 billion Port Arthur LNG plant Trains 1 and 2 in Port Arthur, Texas, and Dominion Energy’s offshore wind project of $9.8 billion in Virginia Beach, Virginia.
Looking ahead, Branch expects growth to improve on the private side. “High interest rates have weighed on the pattern of starts this year, but the stability of the Dodge Momentum Index, which tracks projects in the planning stage, provides optimism that once rates start to come down, there will be a broader acceleration of starts.”
“[Construction starts are] mostly bifurcated, with publicly funded projects outstripping the private sector.”
Richard Branch, Chief Economist, Dodge Construction Network
Paul Brussow, president of Rider Levett Bucknall, also expects falling interest rates to boost construction, particularly on the residential side. “During the second half of the year, mortgage rates should decline in tandem with Treasury yields,” he says. “This should provide a bit more support to residential demand through increased affordability.”
While interest rates are falling, labor shortages remain, causing wages to rise. “Wages rather than materials are our main concern when thinking about construction costs in 2024,” says Michael Guckes, senior economist at ConstructConnect. “We remain concerned about the industry’s ability to improve labor productivity as a way to combat a fourth consecutive year in which construction wages are likely to rise another 4-5%.”
Lumber and steel prices have fallen
“Softwood lumber prices have fallen significantly from where they were just two to three months ago,” says Luke Lillehaugen, senior economist at S&P Global Market Intelligence. “Prices rose in the first quarter due to tight supply, but have since eased as changing expectations about the timing of the Federal Reserve’s monetary policy easing lead to weaker demand for wood.”
In its second quarter forecast, S&P Global Market Intelligence forecasts a 5.8% global decline in softwood lumber prices this year, with a 4.2% rebound in 2025. Prices for plywood to decline by 0.6% in 2024, with an additional 0.9% decline next year. .
In the steel market, prices “continue to come down,” says John Anton, chief economic officer at S&P Global Intelligence. “U.S. prices were the slowest decliners after the global rally in 2022. So in many ways the declines are simply an equalization rather than signs of underlying weakness.”
S&P Global Market Intelligence forecasts rebar prices to fall 11.6% in 2024, and fall another 2.5% next year. Structural shapes prices are expected to decrease by 16.5% and 16.2% in 2024 and 2025, respectively.
“Prices are expected to find a floor in early 2025, with some products possibly bottoming out in late 2024,” says Anton. “Global prices may have some sharp declines if mainland China has to liquidate excess construction steel inventory, but the US is largely insulated by protectionism.”
